Examining the Effect of Tax Authority Regulation and Administration on Voluntary Compliance in Kenya: A Case of Small Scale Businesses in Kakamega Municipality, Kenya

Gerishom Wafula Manase
Volume 1; Issue 2
Paper- 3
“Examining the Effect of Tax Authority Regulation and
Administration on Voluntary Compliance in Kenya: A Case of
Small Scale Businesses in Kakamega Municipality, Kenya”
www.ijmst.com July, 2013
International Journal for
Management Science
And
Technology (IJMST)
ISSN: 2320-8848 (Online)
ISSN: 2321-0362 (Print)
Dr. Musiega Douglas
Director
Jomo Kenyatta University of
Agriculture and Technology
Kakamega campus
Janet Owola
MBA (Finance)
Dr. Ondiek B. Alala
Lecturer Accounting and
Finance
School of Human Resource and
Development
Agriculture and Technology
Kakamega campus
Geoffrey Atika Makori
MBA (Finance) Student
Agriculture and Technology-
Kakamega Campus
Gogo Tabby Wanjiru
Lecturer- Masinde Muliro
University of Science and
Technology (MMUST)
Kipchumba Samuel
Lecturer
University of Kabianga
Department of Economics
Kericho, KENYA

International Journal for Management Science and Technology (IJMST)
Vol. 1; Issue 5
ISSN:2320-8848(O.)/2321-0362(P.) Page 2 July, 2013
Abstract
This study sought to examine the effect of tax authority regulation and administration on
voluntary compliance among small-scale businesses in Kakamega Municipality. The
beneficiaries of the study are to be the Kenya revenue authority and relevant tax agencies. It
may serve as input in designing the tax system both at the counties and national government;
may serve as a reference for further studies in this area The research design adopted was a
descriptive survey as the findings were be generalized to a large population and it will
determine the current situation on the ground thereby providing the opportunity to improve it
accordingly. Data was collected using structured questionnaires to 124 sampled taxpayers
purposively sampled. Markets were stratified in the identification of business. The project
was analyzed using descriptive statistics and SPSS. The taxpayers do not to comply with the
tax laws due to overstatement of tax rates or lack of tax equity and ineffectiveness of the tax
authority. It needs to strengthen itself by educating and training its employees, by
computerizing its operations and devoting additional resources.
Key Words
Inland Revenue Service: Prescribed Payment System, Public sector integrity programme
Small and Medium Enterprise (SME); Value added tax, Tax: Tax avoidance; Tax compliance,
Tax evasion; Tax gap
Introduction
Hostility towards tax compliance date back to the History of Taxation.Taxes are considered a
problem by everyone, which dates back to the earliest recorded history” (Director, Taxworld
Organization,(1999). According to the Director, Tax world Organization, (1999), during the
Roman empire, in 60A.D, Boadecia queen of East Anglia led a revolt that can be attributed to
corrupt tax; in Great Britain, the 100 years war (1337-1453) between England and France
was renewed in 1369 by among other key factors, the rebellion of the nobles of Aquitaine
over the oppressive tax policies of Edward, The Black Prince and in Post-Revolution
America, Tax Act of 1864 was challenged several times. (African Journal of Business &
Management Vol. 1 (2010)
A study carried out in America by Internal Revenue Service officials (IRS) estimated Year
2001 tax gap based on the National Research Program (NRP), the overall gross tax gap for
Tax Year 2001 – the difference between what taxpayers should have paid and what they
actually paid on a timely basis – was $345 billion. IRS enforcement activities, coupled with
other late payments, recovered about $55 billion of the tax gap, leaving a net tax gap of $290
billion for Tax Year 2001.The vast majority of Americans pay their taxes accurately and are
short changed by those who do not pay their fair share. The magnitude of the tax gap
highlighted the critical role of enforcement in keeping the system of taxes.
Australia has made major efforts in implementing initiatives to better understand compliance
problems of Medium Small Enterprises (MSEs) and developing strategies to facilitate and
improve MSE tax compliance. The major step in this respect was the establishment of a Cash
Economy Task Force by the Commissioner of Taxation in November 1996. The objective of
the Task Force was to examine the nature of the cash economy, to determine what the likely
compliance issues are and to develop a view about what additional steps can be taken by the
Australian Taxation Office (ATO) to address tax evasion in the cash economy. The Task
Force produced three comprehensive reports. The recommendations included in these reports

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can also provide some guidance to tax reform efforts in developing countries. A core part of
the recommendations dealt with possibilities to reduce the tax compliance burden and
facilitate voluntary tax compliance.
Kenya is ranked among low-income countries or low compliance countries with the hard task
of ensuring efficient and effective tax administration, in order to ensure tax compliance,
hence raising more revenue. The tax system in Kenya has been designed to primarily raise
revenue for funding government operations and to a lesser extent to address inequality as can
be deduced from the nominal progressivity of the income tax structure.
Empirical evidence on the ground shows there has been hostility between the taxpayers and
tax collectors on issue relating to tax compliance. for instance the survey by Ipsos Synovate
shows that the proposal by Treasury in the 2012/2013 budget to close in on unscrupulous
landlords who have not been paying tax raised anxiety amongst both landlords and tenants.
Seventy-four per cent of landlords do not want to pay taxes. 64 per cent of Kenyans do not
support this proposal and six out of ten tenants are against its implementation, Yet rental
income is like any other business income and landlords are supposed to pay tax on this
income. (Daily Nation, June 27th, 2012, pg 24) ,also the tax evasion cases reported daily in
our local newspaper (Daily Nation, July 7, 2006, pg 3) and outward resistance from taxpayers
for example the recent protest by tax payers over implementation of Electronic Tax Registers.
(African Journal of Business & Management Vol. 1 (2010)
In many under developed countries like Kenya the low revenue yield of taxation can only be
attributed to the fact that the tax provisions are not properly enforced, either on account of the
inability of the administration to cope with them, or on account of straightforward corruption.
But factors on the other side of the system get little attention, i.e. minor attention is given to
the cultural background of tax payers, their awareness level, compliance behavior and its
determinants when designing a given tax system. The tax system must be fair, both to
promote the objective of an equitable distribution of income and to assure continued
voluntary compliance by the taxpayer (Eckstein, 2003).
1.2. Statement of the problem
Tax compliance, according to Cobham (2005), is a problem to many countries as measured
by tax to GDP ratio although it has been improving for many countries.
The Doha Declaration confirms the need to step up efforts to enhance tax collection,
investment and other private flows, with a view to supporting pro-poor development. Yet half
of sub Saharan African countries still mobilize less than 17% of their GDP in tax revenues,
below the minimum level of 20% considered by the UN as necessary to achieve the
Millennium Development Goals. Several Asian and Latin American countries fare little
better. (Supporting the development of more effective tax systems -2011, A report to the G-
20 Development working group by the IMF,OECD,UN and world bank )
By June, 2012 last, Kenya‟s public debt had ballooned to Sh1.7 trillion, which is equivalent
to 48 per cent of the GDP. The debt was hovering towards the 50 per cent mark that is
considered unmanageable and unsustainable.
The challenge of lack of knowledge on the effect of tax authority and administration on
voluntary tax Compliance is serious on the grounds that it may have played part in the Kshs

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60 billion in half year tax collection short fall in 2012/2013 financial year (Standard
Newspaper, January 15, 2013) and Ksh. 11.47 billion tax collection short fall in 2011/2012
financial year (Standard Newspaper, July 21, 2012), and even after aggressive marketing by
KRA in the print and electronic media, The existing tax compliance gap in Kenya has been
40% (price-waterhousecoopers-2009).
According to the information obtained from Kakamega Municipality, only about 60% of the
business communities that are subjected to tax are paying their tax obligation regardless of
the existing powerful tax proclamation (Kakamega Municipal council 2011/2012 financial
report). This clearly shows that relying solely on legal enforcement (stick approach) may not
work always and forever.
The study therefore sought to examine the effect of tax authority regulation and
administration on voluntary compliance among small-scale businesses in Kakamega
Municipality.
1.3. Objectives of the Study
This study sought to examine effects of tax authority regulation and administration on tax
compliance among small scale enterprises in Kakamega Municipality.
1.4 Research questions
Does tax authority regulation and administration affect tax compliance among small scale
enterprise in Kakamega Municipality?
1.5 The Scope of Study
The study was to examine effects of tax authority regulation and administration on tax
compliance among small scale enterprises in Kakamega Municipality. It focused on SMEs
1.6 Significance of the Study
Improved tax compliance amplifies the revenues available for supporting public services
without increasing the current tax burden on compliant tax payers. Improved tax compliance
bolsters citizen's satisfaction by increasing their faith in the system and promoting the
perception that everyone pays its tax obligation. It would help to design an efficient and
effective tax system that may help to narrow the existing compliance gap in Kenya. Both
county and national governments to make use of the output of the study in addressing the
voluntary tax compliance problems. It may give highlights that would serve as a basis for
further nationwide research and policy design in addressing the issue.
Review Of Literature
2.1. Tax Compliance by Small Scale Businesses
The definitions of tax compliance frequently used in the literature might be considered to be
too simplistic. As cited by James, et al (2003), a more comprehensive definition has been
developed by James and Alley (1999). The most common previous approach has been to
conceptualize compliance in terms of the „tax gap.‟ This represents the difference between
the actual revenue collected and the amount that would be collected if there were 100 per cent
compliance, though there are some variations as in the financial year 2008/2009 the KRA
failed to meet its targets. Similarly according to James (2000), tax compliance is expressed in
terms of degree to which taxpayers comply with tax law, and the degree of non compliance is
measured in terms of the tax gap, which is defined by (Andreoni et al, 1998 and Saalemi,

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2000) the difference between the taxes that the law seeks to collect and those in fact
collected. This gap happens by means of both tax avoidance and tax evasion. Similarly,
compliance gap is also defined by ( Deloite and Touch, 2005) as the break between the actual
and the potential tax revenue and how that gap varies among the different sectors of the tax
paying population. Andreoni et al. (1998) include a time dimension to compliance, but still
mainly concerned with tax evasion as the central part of the tax gap definition. Regarding
time dimension, James (2000) states that a tax payer might eventually pay his/her full liability
but, if the payment is late, the taxpayer cannot be considered to have been compliant. A more
recent definition consists of three distinct types: payment compliance, filing compliance and
reporting compliance. However, these basic concepts of the „tax gap‟ of non-compliance
seem to be far too simplistic for practical policy purposes. Successful tax administration
requires taxpayers to co-operate in the operation of a tax, rather than be forced to undertake
every aspect of their obligations unwillingly. Tax law cannot cope with every eventuality and
has to be supplemented with administrative procedures and decisions and, just as importantly,
in order to work it has to have a reasonable degree of willing compliance on the part of the
taxpayers themselves ( James et al 2003).
One issue is whether „compliance‟ refers to voluntary or compulsory behavior. If taxpayers
„comply‟ only because of dire threats or harassment or both, this would not appear to be full
compliance, even if 100 per cent of the tax was raised in line with the „tax gap‟ concept of
non-compliance. Instead, it might be argued that proper compliance means that taxpayers
meet their tax obligations willingly, without the need for enquiries, obtrusive investigations,
reminders or the threat or application of legal or administrative sanctions. A more appropriate
definition could therefore include the degree of compliance with tax law and administration
that can be achieved without the immediate threat or actual application of enforcement
activity.
Tax compliance may be seen in terms of tax avoidance and tax evasion. The two activities are
conventionally distinguished in terms of legality, with avoidance referring to legal measures
to reduce tax liability and evasion to illegal measures. James (2000) describes tax avoidance
as the legal manipulation of an individual‟s affairs in order to reduce tax. However, if
taxpayers go to inordinate lengths to reduce their tax liability, this could hardly be considered
„compliance‟, even if it were within the letter of the law. Since taxation is not always precise,
Seldon (1999) in James et al (2003) has also coined the term „tax evasion‟ to describe
circumstances where the law might be unclear. However, some commentators see non-
compliance only as a problem of evasion, which does not seem to capture the full policy
implications of the issue. Clearly tax evasion is an extreme form of non-compliance.
However, if law-abiding taxpayers go to inordinate lengths to reduce their liability this could
hardly be considered to be „compliance‟ either. Such activities might include engaging in
artificial transactions to avoid tax, searching out every possible legitimate deduction, using
delaying tactics and appeals wherever this might reduce the flow of tax payments and so on.
„Tax exiles‟ even seem to prefer to migrate, rather than fulfill their obligations as citizens -
hardly an example of „compliance.‟
Even if such activities are within the letter of the law, they are clearly not within the spirit of
the law. Compliance might therefore be better defined in terms of complying with the spirit
as well as the letter of the law The „tax gap‟ approach overlooks the possibility that some
taxpayers pay more than their legal obligation. Not all taxpayers seek out every possible
method of reducing their tax liability and an unknown number do not claim their full

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entitlement on allowable deductions. A better definition of compliance might therefore
include actions which are consistent with the spirit as well as the letter of the law. On the
other hand a definition of non-compliance might be the failure of taxpayers to act in
accordance with the statutory requirements or intentions of the tax law and administration
without the application of enforcement activity. In all the expressions compliance can be
understood as acting in accordance with the law and non compliance is deviation from the
law. Based on the above expressions the definition of tax compliance can be shortly refined
as the desire or willingness of the taxpayers to act in accordance with the tax law and the
voluntary effort they exercise to pay their tax liability on timely basis.
As stated by Schultz (2004) and Fjeldstad (2004), without trust there is little basis for social
co-operation and voluntary compliance with laws and regulations that could potentially
benefit everyone. The temptation not to comply even if others do comply defines the free
riding problem that is endemic in collective action situations in private as well as public
institutions. A topic that has interest from a variety of commentators is the issue of tax
compliance. No tax system can function effectively without the co-operation of the great
majority of taxpayers, so the factors that affect compliance are important. The definition of
compliance is usually cast in terms of the degree to which tax payers comply with tax law. It
has been said that the degree of non-compliance can be measured in terms of the 'tax gap'.
This represents the difference between actual revenue and that which would be received if
there were 100% compliance (James, 2000)
Voluntary compliance is a function of public attitude towards taxation and organizational
strength (efficiency and effectiveness) of the tax authority. Public attitude towards taxation is
also in turn affected by the social, cultural, and political factors as well as awareness about
tax and fairness of the tax system. If it is perceived that only those who are wealthy or
dishonesty or both benefit from noncompliance, this might reduce 'tax morale' and the
willingness of the rest of the population to comply. It has been noted by Wall Schutzky
(1993) in James (2000) that, most of the attention in this area has been devoted to why some
taxpayers do not comply rather than why others do. Nevertheless, this study tries to focus on
both sides i.e. why do taxpayers comply and why others do not comply. Even though Kenyan
modern tax administration is not older than half a century, it has undergone several legal
amendments during this time. However, the improvement is not as big as its age as far as
citizen's voluntary compliance is concerned.
The tax system in the country mainly stresses on legal enforcement as a remedy to ensure its
proper functioning. For example, the current income tax proclamation has increased the
amount of penalties and strengthened the means of enforcement while it states nothing about
how to create and increase the awareness of the taxpayers. It gives the tax authorities the right
to sell the property of evaders without going to courts in order to collect the outstanding tax
liability. Most of the reform efforts targeted institutional capacity building and putting
enforcing legal frameworks in place while only insignificant effort, if any was deployed to
make the public aware of the benefits of paying tax to the nation.
The taxpayers education program that is being carried on very occasionally, stresses more
about teaching the contents of the tax laws and penalties rather than promoting citizens‟ sense
of responsibility toward taxation and devising ways to reward compliant behavior.

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2.1.1 Factors determining tax compliance behavior
The problem of tax compliance is as old as taxes themselves. Characterizing and explaining
the observed patterns of tax non-compliance, and ultimately finding ways to reduce it, are of
obvious importance to nations around the world (Andreoni et al, 1998).According to Bhatia
2009, the attitudes of the taxpayers in this regard are influenced by a host of other factors like
the political situation, natural calamities, economic situations, socio cultural and so on. Due
and Friedlaender (2001) also state that a person‟s preference for a tax may be influenced if
the tax- or an increase in it- is tied directly to the expenditures he strongly favors. Generally,
attitudes toward choice of taxes and tax structures are greatly influenced by various criteria-
often called principles- of taxation that have come to be widely accepted.
2.1.2 Non compliance as intentional behavior.
Most theories of tax compliance, as well as empirical works have until recently been
premised on the assumption that tax under reporting is an intentional behavior. (Smith and
Kinsey, 1997) Behavior that is unintentional has either been ignored or set aside in a footnote
or can be safely ignored as random noise. However, as noted earlier, the evidence is
accumulating that unintentional noncompliance is neither small nor inconsequential. Nor it is
necessarily random in nature. As far as Kenya‟s practice is concerned tax non compliance is
not only an intentional behavior it is also attributed to lack of ability to pay, lack of awareness
and weak institutional capacity of the revenue administrations and other factors.
2.2 Dimensions of Ensuring Compliance
The revenue of the state is the state (Long and Swingen, 2002) Put another way, without the
legal authority to collect taxes and the compliance of the citizenry to these laws, government
is a sham. It is this fact that taxes are profoundly essential to the existence of all successful
states- that makes the age-old question of why people pay or fail to pay their taxes of central
interest. This is a complex area and different commentators have offered different analyses.
The two main approaches are to concentrate on the probability of detection and on penalties
for non-compliance (the „carrot and stick‟ approach) or activities designed to promote
voluntary compliance (the responsible citizen‟ approach).
2.2.1. The ‘carrot and stick’ approach
According to James (2000), the carrot and stick approach is based on relatively narrow
interrelationships of economic rationality. According to this approach, individuals maximize
their utility by maximizing their income and wealth. They will evade tax if they consider that
by doing so they can expect to increase their spending power. Noncompliance can therefore
be explained by factors such as the level of tax rates, the probability of being caught evading,
the penalties imposed and the degree of risk aversion.
2.2.2. The responsible citizens’ approach
Regarding the responsible citizens‟ approach Song, and Yardbrough (1998) extends this
discussion by, looking outside economics; other academic disciplines have suggested factors
which might be important in influencing taxpayers‟ behavior. Sociology has offered a
number of variables such as social support, social influence, attitudes and certain background
characteristics such as age, gender, race and culture. Psychology reinforces this approach and
has even created its own branch of „fiscal psychology‟. The contribution from psychology
includes the indication that attitude towards the state, the revenue authorities are as important
factors as perceptions of equity. If psychological and sociological factors are important then a

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major drawback of the carrot and stick approach becomes apparent. While such an approach
might be considered by some as suitable for donkeys, human beings might not respond so
positively. The result might be a reduction in voluntary compliance. For instance, as cited in
James (2000) reported that the German tax system was very rigid in its assessment
procedures, which led to an effective but expensive and confrontational system. The result
was a high degree of alienation and resistance among taxpayers. The conclusion would seem
to be that a successful compliance policy should take account of a much wider range of
motivations than simply rewards and punishments .The tax system (Eckstein, 2003) must also
be fair, both to promote the objective of an equitable distribution of income and to assure
continued voluntary compliance by taxpayers.
2.3. The Relevance of Understanding Tax Compliance
According to James et al (2003), a number of tax authorities have been moving towards a
more sophisticated approach to tax compliance. Traditionally there seems to have been an
assumption that with a basic level of assistance for taxpayers, together with an enforcement
program, tax compliance could be expected to be maintained at satisfactory levels. However
there seems to have been a shift in attitudes towards treating the taxpayer less as a passive
donor who simply has to be billed for taxes due and more as a customer sometimes requiring
particular forms of assistance and support. The choice (Smith and Kinsey, 1997) between
compliance and non compliance may only be a matter of opportunity, convenience, or even
interpretation of the law. Legal validity, economic and social purpose, distributive
justification, and revenue yield may all be defeated if a tax is not levied and collected well.
No matter what the justifications advanced, a tax fails to the extent that it is avoided or
evaded (Shultz and Harriss, 2004).
Taxation is an inevitable phenomenon in any economy or nation as far as services and other
roles are expected from governments. Even though the history of taxation is as old states or
governments, still there are gaps in every nation, particularly underdeveloped countries like
Kenya as far as voluntary compliance is concerned. Taxes are considered by many citizens as
necessary evils that cannot be avoided under normal conditions. Hence, the issue of voluntary
compliance is a central idea when dealing with efficiency and effectiveness of a tax system.
Even if a lot of research has been carried out on the factors affecting compliance little has
been done on the factors affecting voluntary tax payer‟s compliance taxation in third world
countries. This study will therefore try to fill these gaps, by analyzing these small scale
businesses
2.4 Classification of small scale businesses
There is no universally accepted definition of a small scale business. Some authorities define
a small scale business as one which is independently owned and operated but is not dominant
in its field. Others define it as those businesses that are financed by the owners and their
personal funding sources are considered small. another school uses the yardstick such as the
total number of employees, total investment and sales turnover to classify a business as small
or large though the upper limit of these is not universally accepted in all countries, in Kenya
the Micro and Small Enterprise (MSE) Act, categorizes enterprises into four sectors,
agribusiness , services, trade and manufacturing , the law further defines micro enterprises as
those business with annual turnover of not more than Kshs 500,000.00 and that employ less
than ten people , while small enterprises are defined as those with annual turnover of Kshs
500,000.00 – Kshs 5,000,000.00 and that employ up to fifty people. Therefore a small scale
business is one which employs between 11-50 employees in both the informal and formal

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sector and whose turnover from business does not exceed shs5 million during any year of
income. These include manufacturing sector, agricultural, construction, professional services
and merchandise business.
2.4.1 Importance of small scale businesses
The government has been keen on the development of small scale enterprises due their
substantial contribution to the economy in the following ways;
Generation of revenue; The country‟s tax collection grew by 12.6 per cent to hit Sh380
billion in the first half of the 2012/2013 financial year ending December,2012 buoyed by
medium and small taxpayers(Standard Newspaper, January 15th, 2013), Creation of
employment opportunity, expanding national trade by offering linkages with large firms
which strengthens the economy through the provision of materials and components, enhances
competition whereby availing products to customers at reasonable prices, broadens the tax
base thus generating income to the government, promotes rural development hence reducing
rural to urban migration, helps entrepreneur acquire skills important for national
development.
2.4.2 Challenges facing small scale business in Kenya
Lack of capital or access to credit facility this stems from stringent collateral or security and
deliberate long delay associated with loan processing, lack of proper management skills, poor
credit management skills, lack of knowledge of market system, poor infrastructure, tying too
much capital in fixed assets, corruption, insecurity, government policies (Holt, D. H, 2006)
2.4.3 Taxation of small scale businesses
All tax payers whose gross turnover is below shs 5 million and above 0.5 million per year are
required to pay turn over tax (tot) at the rate of 3% on gross sales per-annum, the individuals,
partnerships and companies whose annual income does not exceed 0.5 million p.a are not
required to register. For TOT purposes “business” includes any trade, profession or vocation,
and every manufacture, adventure and concern in the nature of trade. The TOT registered
taxpayers shall maintain the following records; Cash books, sales receipts and invoices,
purchases invoices, bank statements. For TOT purposes, tax period means every 3 calendar
months commencing 1st
January every year. (KRA, 2006).
2.4.4 Enforcement
TOT payers who fail to submit the quarterly returns will pay a default penalty of shs 2,000
Failure to pay tax by the due date shall attract late payment compounded at 2% per month, or
part thereof
2.5 Tax administration in Kenya
The imposition of the Hut Tax, and later the Poll Tax, was definitely not a welcome
development to taxpayers in the early 20th
Century. This negative view of taxation persists
even now, in the early years of the 21st
Century. In a recent article on Strengthening Tax
Administration in East and Southern Africa, Dr. Sandra Hadler of Price-Waterhouse-Coopers
wrote that “almost daily, articles in regional newspapers denounce the tax structure and its
negative impact on businesses and growth; the high costs of tax compliance, extensive
evasion, overzealous and corrupt tax officials; and the extremely narrow tax base.

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There is need to distinguish tax policy from the risk of repeating the obvious, let us bear in
mind that promulgation of tax policy is the domain of the Ministry of Finance (Treasury),
while tax administration in Kenya is vested in the Kenya Revenue Authority (KRA). KRA is
the predominant government revenue collection agency accounting for over 96% of
Government Ordinary revenues. The Authority administers eighteen Acts of Parliament as
well as collects agency revenue for several Government Agencies. The operational metaphor
for the relationship between KRA and the Ministry is Principal (Tax Policy: Ministry of
Finance) and Agent (Tax Administration: KRA). Back in 1997, two International Monetary
Fund tax experts, Carlos Silvani and Katherine Baer, estimated the following differences
between the tax that ought to be paid according to the statutes and the tax that is actually paid
(the tax gap): For Singapore, New Zealand and Denmark, the gap was 10%;For US, Canada
and Chile, the gap was 20%;For Argentina, Peru and Philippines, the gap was 40%;For
Kenya, the gap was over 40%. (KIPPRA, 2005)
The challenge is to work towards reducing the tax gap, comparing the performance of
revenue agencies in the developed world with our own agencies could only be accurate up to
a point. For example, the Kenya government has a matter of policy chosen to keep the tax to
GDP ratio at around 22.5% in the knowledge that a larger ratio is a disincentive to the growth
of business. While Botswana‟s tax to GDP ratio is 40%, the lower ratio in Kenya is not
necessarily evidence of weak tax administration, it is a reflection of the structure of the
different economies in terms of (a) the size of the formal sector, and (b) the contribution of
agriculture to the GDP. Formation of KRA showed the government‟s commitment to
taxpayers that the tax collection would be more competent, efficient and fair. Unfortunately,
efficiency in tax administration sometimes leads to complaints that tax officials are “high-
handed” or “overzealous”. While every effort is made by KRA to be honest and civil in
dealings with taxpayers, it is important to deal with the issue of tax evasion in the interest of
ensuring the tax system is equitable. from research Large fines are a more effective deterrent
for tax evasion that the probability of being audited In some situations, appeals to conscience
and civic responsibility are more effective than legal sanctions; Persons perceiving gross
inequities in the tax system have a higher propensity to evade; The rate of evasion is
correlated with tax rates; A taxpayer‟s compliance is correlated with that of his friends,
relatives or acquaintances; High compliance costs act as a barrier to investment; a citizen‟s
commitment to obey the tax laws is dependent upon the state‟s ability to ensure compliance
of others ( KRA 2006). Some of the problems include
i. Taxation of the Informal Sector;there is a large informal sector
in Kenya that is not within the tax net, yet all must contribute to raising the
resources to finance government expenditure and thus ensure equity in taxation.
ii. High incidence of tax evasion; Kenya has been estimated at
over 40%.
iii. Lack of, or poor awareness of the tax laws.
Does awareness increase compliance? Ignorance of the law is no defence, but a taxpayer who
is aware of the law is more likely to make a more rational decision on whether or not to meet
their tax obligations
Transfer pricing is another challenge. Taxing multinational corporations is difficult. Due to
their size, they are able to adopt transfer pricing mechanisms to reduce their tax liabilities and
shift profits to countries with lower tax burdens. Taxation of e-commerce transaction, the
technologies underlying e-commerce provide unique opportunities for improved taxpayer

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services. However, e-commerce has the potential to make more difficult transfer pricing
problems more common. Use of information technology in support of tax administration,
there are many success stories in the use of computerization in this area e.g. Spain, Mexico,
Canada, Singapore, New Zealand, etc. Unfortunately, Kenya is cited as a failure: a 2000 John
F. Kennedy School of Government publication says, “Kenya failed to computerize Income
tax administration in the 1970‟s and Customs administration in 1989.” Globalisation and
increasing trade within regional blocks. In an address at the Evian Plenary Meeting on the
Post Cancun Crisis last November, the President of the International Organisation of
Employers (IOE) Mr. François Perigot began with the following words: “Over the last
number of years we have seen thousands of angry people take to the streets throughout the
world to rail against the evils of globalisation, protesting that it is a process that is responsible
for all the world‟s ills today and that governments have lost control.” Most of world trade is
now carried on within trading blocs. This has a direct impact on revenue, especially for
developing countries like Kenya where trade taxes constitute a large proportion of total
government revenue.
In summary tax authority and regulation influence voluntary tax compliance. However, most
contributions were from the developed nations. In third world countries where corruption is
high, poor structures of governance and high illiteracy rates the situation may be different and
very few studies if any may have been done, thus Kakamega Municipality is an ideal area of
study.
2.9 Conceptual framework
There should be a relationship between tax authority and adminstration‟s influence on
voluntary tax compliance. The independent variables are the factors affecting tax compliance,
which are tax authority and regulations. The output (Dependent variable) is voluntary tax
compliance.
Independent variables Dependent variable (output)
Intervening variables
(Source: Author 2013)
Figure 1: (conceptual frame work) Interrelationship between the perceived variables
Source (study’s perceived conceptualization)
The intervening variables are the moderating factors that affect an individual‟s preference to
tax compliance. The dependent variable is a result of the interaction between the inputs
(independent variables) and the intervening variables. The government and other tax agencies
can enhance compliance by education and training, tax amnesty and technology. Through the
Tax authority regulation and
administration
Tax compliance
Tax Education and training
Tax amnesty
Technology

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adoption of proper technology, tax evasion will be minimized, and keeping of records
enhanced like electronic tax register in Kenya. Tax amnesty will encourage tax evaders to
pay sometimes through education programs.
Research Methodology
3.2 Research design.
Descriptive survey design was employed. This intended to describe how that authority and
administration affect voluntary compliance of taxpayers as they exist currently.
3.3 Study Area
The research will be carried out in Kakamega Municipality, which was the headquarters of
Western Province and now it will be the headquarters Kakamega County which is the second
largest county after Nairobi County in terms of population. The study area was purposively
selected due to convenience of the student and financial constraint. It is estimated that
Kakamega Municipality population is about a quarter a million (250,000) and it has
population density of 2,082 persons per square kilometer. Kakamega town is a commercial,
administration and transportation centre of Western Kenya found on the northern side of
Lake Victoria – about 52 kilometer from Kisumu City. It has 8 commercial banks, 4 micro
finance institutions. This made it a good area for the study.
3.4 Target population
The target population of this study are small enterprises in Kakamega municipality, which
has a population of 2,700 Kakamega Municipal Council financial report (2011), out of which
250 small enterprise business which pay daily municipal fees will be the total target
population for this study, these are lower taxpayers of the municipality due to the fact that
these taxpayers are not required by law to declare their income or keep books of account and
are considered as hard to tax group. These are small scale businesses with an annual turnover
of less than one million and include most of the enterprises.
3.5 Sample Size and Sample Selection
A standard assessment method will be used to determine the income tax liability of the
taxpayers. The standard assessment were based on a fixed amount of tax determined in
accordance with Municipal council and KRA regulations establishing a schedule of standard
assessment amounts that reflect variations in the type of business, business size, and business
location. Three urban markets were selected for this study and these are Kakamega Town
Centre, Amalemba and Lurambi based on the density of taxpayers. Purposive sampling was
used to have the required characteristics for the study. Then proportional number of samples
(tax payers) were allocated to main business sectors which were considered as strata and
samples were randomly drawn from each sector/ strata. Sampling procedure was based on a
formula;-
( Mugenda and Mugenda, 2003; ).
n = Z2
pq
d2
Where:
n = the desired sample size (if the target population is greater than 10,000).
Z = the standard normal deviation at the required confidence level.
d = the level of statistical significance set (0.05).
p = a proportion in target population (20% = 0.2).

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q = 1 - p = 0.8
Therefore the desired sample size will be;
N = (1.96)2
(0.2) (0.8) = 245
(0.05)2
Given that the target population is less than 10,000. Therefore the actual sample size will be;
nf = n
1 + n/N
Where nf = desired sample size (when population is less than 10,000).
n = desired sample size (when population is more than 10,000).
N = the estimate of population size.
The target population for the study will be 250 businesses
nf = 245
1+ 245
250
= 124
This was to ensure that a major business sector within a population was adequately
represented in the sample, and to improve efficiency by gaining greater control on the
composition of the sample.
The respondents of the selected sample were mainly business owners based on the nature of
the size of their enterprises as they lacked the capacity to hire qualified employees.
The business sectors were selected based on the number of tax payers engaged in each sector
or those commonly practiced businesses will be taken into account.
Market Population Sample size Percentage of
sample
1 60 38 30.64
2 95 43 34.68
3 95 43 34.68
Total 250 124 100
Table 3. 1: Sample and sampling design
3.6. Data Collection instruments
Primary data was collected through structured questionnaire. The questionnaire comprised of
both closed and open ended questions. The questionnaire included questions related to
taxpayer‟s general knowledge about taxation, questions related to tax authority (KRA), tax
payers attitude towards tax, taxpayers socio cultural and political situations.
3.6 Data collection methods
Permission was sought from the relevant authorities KRA and Municipal council before the
questionnaires were given to the respondents by the enumerators who were hired to undertake
the job after taking the necessary training on ethical issues on data collection. Individuals
who had familiarity with the tax administration and were familiar with the taxpayers were
selected for this job.
3.6.3. Data Validity and Reliability of Instrument

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Validity is the degree to which results obtained from data analysis actually represents the
phenomenon under study while reliability is a measure of the degree to which a research
instrument yields consistent results or data (Mugenda and Mugenda, 1999).
To ensure content validity of the data collection instrument, expert opinion was sought. To
ensure reliability, internal consistency of data was determined from these questionnaires. The
score obtained in one item was correlated with scores obtained in other items in the
questionnaire. The Cronbach‟s Coefficient Alpha was calculated to determine how the items
correlate with each other. The measure was preferred to other measures of reliability since it
gave a more conservative (which is always lower to avoid erroneous conclusions) estimate of
data reliability (Mugenda and Mugenda, 1999).
3.6.4. Data Analysis
Data obtained was analyzed through descriptive statistics. Descriptive statistics describe the
main features of a collection of data quantitatively. The statistical package for social sciences
(SPSS) was used to run descriptive analysis to produce frequency distributions, percentages
while charts, and tables were produced using MS Excel.
Results and discussion
4.2 Sample characteristics
There were 124 respondents
4.2.1 Age of respondents
58.9% fell below 30 years, 22.6% between 31-40years, etc (Table 4.1 )
Age
AREA
Total
Total
%
AMALEMBA LURAMBI TOWN
18-30 29 21 23 73 58.9
31-40 5 15 8 28 22.6
41-55 3 6 11 20 16.1
56> 1 1 1 3 2.4
Total 38 43 43 124 100
Table 4.1 Age of respondents
Majority of the respondents were between 18-30 years 58.9% which is a group that is easily
affected by peers. This majority of the respondents were young and well informed over
current issues including taxation.
4.2.2 Gender of the respondents
54.5% were men and 45.5% women ( Table 4.2)
Gender
AREA
Total
Total%
MALE 24 21 22 67 54
FEMALE 14 22 21 57 46
Total 38 43 43 124 100
Table 4.2 Distribution of Gender

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The Table 4.2, men are more available than women as most businesses are run and owned by
men while women are busy with domestic chores, 65% of the respondents were married. This
shows that most businesses are relatively stable.
4.2.3 Level of education
6.5% had not completed secondary education, 43.5% had; 9.7% % had not completed college
education, while 24.2% had; thus most of the respondents had adequate education to run their
individual businesses( Table 4.3 level of education)
EDUCATION LEVEL
AREA
Total %
AMALEMBA LURAMBI TOWN Total
PRIMARY
INCOMPLETE
3 1 2 6 4.8
PRIMARY COMPLETE 1 8 5 14 11.3
SECONDARY
INCOMPLETE
3 3 2 8 6.5
SECONDARY
COMPLETE
20 18 16 54 43.5
COLLEGE
INCOMPLETE
3 5 4 12 9.7
COLLEGE COMPLETE 8 8 14 30 24.2
Total 38 43 43 124 100
Table 4.3 Level of education
Generally, 77.4% had secondary education and above and therefore expected to keep proper
books of accounts and comply with tax laws.
4.2.4 Length in Business
45.2% had been in business for less than five years, 32.3% between 6-10 years, and 15.3%
between 11-20 years etc. Thus most of the respondents had adequate experience to run their
individual businesses.
Table 4.4 Length of time in business
4.2.5 Length of Paying Taxes
The respondents were asked to state how long they have been paying taxes, out of 124
respondents who participated, 62.9% had been in business for less than five years, 20.2%
between 6-10 years, and 13.7% between 11-20 years etc. This matched with the number of
years they have been in business.

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HOW LONG PAYING
TAXES
AREA
Total
Frequency
Total
%
5< 21 25 32 78 62.9
6-10 8 11 6 25 20.2
11-20 8 6 3 17 13.7
21> 1 1 2 4 3.2
Total 38 43 43 124 100
Table 4.5 Length of paying Taxes
4.2.6 Type of businesses
47.6% owned retail shops, 21% in food & hotel, and 14.5% electronics (Table
4.6 Types of Business);
TYPE OF BUSINESS
AREA Total
Frequency Total %
RETAIL SHOP 17 22 20 59 47.6
MPESA 4 2 0 6 4.9
FLORIST 2 0 0 2 1.6
FOOD &HOTEL 2 9 15 26 21
COMPUTER
SERVICES
2 0 0 2 1.6
TRANSPORT 2 2 0 4 3.2
FARMING 2 1 1 4 3.2
ELECTRONICS 6 6 6 18 14.5
BARBER &
BEAUTYSHOP
1 1 1 3 2.4
Total 38 43 43 124 100
Table 4.6 Type of Business
4.3 Descriptive analysis
Descriptive analysis was carried out in accordance to the objectives of the study: to examine
the effects of tax authority regulation and administration on tax compliance among small
scale enterprises in Kakamega Municipality.
Factor analysis was used to reduce the number of variables for each measure of Tax authority
regulation and administration. For tax authority regulation and administration; tax law
should be respected, attending tax education session, if employees of KRA are trustworthy,
opinion on tax system collection, service delivery, why pay taxes and who is to blame for
poor tax compliance, were the underlying factors.
4.4 Tax authority regulation and administration
The knowledge of tax payer with regard to tax authority regulation and administration; these
include tax law should be respected, law enforcement, attending tax education session,

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service delivery, if employees of KRA are trustworthy, Opinions on tax system, why pay
taxes and who is to be blame for poor tax compliance.
4.4.1 Reasons for Paying Taxes
One of the objectives of the study was to determine the factors influencing taxpayers‟
voluntary compliance, thus the reasons given by the respondents for paying taxes were as
shown (Table 4.7) .
Why Pay Taxes
Frequency
Percent
%
Cumulative
Percent %
AVOID DISTURBANCE 5 4 4
ANTICIPATION OF
PUBLIC SERVICE
38 31 35
NO OPPORTUNITY TO
EVADE
8 6 41
OBLIGATION TOWARDS
THE GOVERNMENT
72 58 99
DO NOT KNOW 1 1 100.0
Total 124 100.0
Table 4.7 Reasons for Paying Taxes
From the above table, out of 124 respondents who participated, 4% said they pay taxes to
avoid disturbance, 31% in anticipation of public service, 6% don‟t have opportunity to evade,
58% it‟s an obligation to the government and 1% do not know why they pay taxes. This
indicates that taxpayers who know proper reasons for paying taxes are complaint 89%, thus
awareness programs should be intensified by the revenue collecting agents. On the other
hand, some of them (6%) said that they have no opportunity to evade, and the
remaining; 4% of the respondents said that they pay taxes to avoid disturbances and 1%
of the respondents said they don‟t know why they are paying taxes . These responses
indicates that they are ready to evade thus their compliance behavior is questionable.
Taxpayer‟s knowledge was one of the factors influencing taxpayers‟ voluntary compliance.
4.4.1 Respect for Tax Laws
On whether tax laws should be respected, 5.6% strongly disagreed, 5.6% moderately
disagreed, 27.4 moderately agreed and 61.3% strongly agreed. Thus most of the respondents
appreciated the importance respecting the tax laws.
Tax Laws Should be
Respected Frequency
Percent
%
Cumulative
Percent %
STRONGLY
DISAGEE
7 5.6 5.6
MODERATELY
DISAGREE
7 5.6 11.3
MODERATELY
AGREE
34 27.4 38.7
STRONGLT AGREE 76 61.3 100.0

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Tax Laws Should be
Respected Frequency
Percent
%
Cumulative
Percent %
STRONGLY
DISAGEE
7 5.6 5.6
MODERATELY
DISAGREE
7 5.6 11.3
MODERATELY
AGREE
34 27.4 38.7
STRONGLT AGREE 76 61.3 100.0
Total 124 100.0
Source: Research data, 2013
Table 4.8 Respect for Tax Laws
4.4.1 Tax education sessions
Asked whether they had attended tax education sessions,74.2% said NO and 25.8% s YES.
Thus most of the respondents had not attended tax education sessions (Table 4.9).
Question
Frequency Percent %
Cumulative
Percent %
NO 92 74.2 74.2
YES 32 25.8 100.0
Tota
l
124 100.0
Table 4.9 Tax Education Sessions
4.4.2 Employees of KRA are trustworthy
On the trustworthiness of KRA employees, 19.4% said yes, 27.4% had no opinion and 53.2%
said. Thus most of the respondents don‟t have trust on employees of the Kenya Revenue
Authority.
Question Frequency
100% Percent %
Cumulative
Percent %
YES 24 19.4 19.4
NO
OPINION
34 27.4 46.8
NO 66 53.2 100.0
Total 124 100.0
Table 4.10 KRA employee trustworthiness
4.4.3 Tax System, assessment and collection procedure
Tax system, assessment and collection procedure is key in promoting voluntary tax
compliance, the respondents were asked to state whether they have trust on the same, 67.7%
said No and 32.3% said yes (able 4.11)

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Question
Frequency Percent %
Cumulative
Percent %
NO 84 67.7 67.7
YES 40 32.3 100.0
Tota
l
124 100.0
Table 4.11 Tax System, assessment and collection procedure
From Table 4.11 (73%) of the respondents had trust in the employees of tax authority; 32.3%
had trust in the tax assessment, collection, and overall tax system while the remaining
majority (67.7%) have no trust. The taxpayers have no trust in the employees and in the
assessment and collection or other procedures. This shows the taxpayers do not know
about the internal procedures of the tax authority i.e. how it assesses and collects taxes or
sufficient information was not communicated to taxpayers. The tax system was
considered so complex and time consuming that taxpayers felt they did not have enough
knowledge to feel secure about the accuracy of their records and returns despite their best
intentions.
4.4.4 Poor tax compliance?
Asked who was to blame for poor tax compliance, 55.6% said Tax Authority, 29% said Tax
payers and 15.3% said license and permit authorities.
Frequency Percent %
Cumulative
Percent %
TAX AUTHORITY 69 55.6 55.6
TAXPAYERS 36 29.0 84.7
LICENSE AND PERMIT
AUTHORITIES
19 15.3 100.0
Total 124 100.0
Table 4.12 Poor tax compliance
4.4.5 Opinion with regard to the strength of tax authority
The respondents were asked to state whether their opinion with regard to the strength of tax
authority based on the below listed parameters (Table 4.12)
Table 4.12 Opinion with regard to the strength of tax authority
From the table it was observed that the respondents who rated service delivery by the tax
authority as excellent were (12.9%), good (16.1%), fair (32.3%) and poor (38.7%).
Regarding tax collection efficiency, the response was, excellent (10.5%), good (12.9%),
fair (32.3%), and poor (44.4%). Similarly, they rated the authority with respect to law
enforcement activity as excellent (16.1%), good (21.8%), fair (31.5%) and poor (30.6%).
Concerning awareness creation, they said excellent (5.6%), good (5.6%), fair (39.5%) and
poor (49.2%). From the table it was clear that the majority of the respondents rated the tax

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authority from excellent to fair except for awareness creation where 49.2% of them
said it was poor. In all the parameters most of the respondents rated the authority‟s effort as
fair and below. The tax authority was perceived as not effective and not providing
satisfying service to taxpayers. The effort of the authority in creating awareness was rated
poor (49.2%), this can be cited as the root cause of all the problems as far as
voluntary compliance is concerned.
The tax authority and the town council didn‟t play their role well in improving the tax
administration, creating awareness, providing social services, and other information
regarding taxes.
4.5 Discussion.
From the above analysis the following factors affected voluntary tax compliance in
Kakamega Municipality among small scale businesses; tax equity/fairness, organizational
effectiveness of tax authority, awareness, social cultural factors. Any strategy to prevent tax
evasion and enhance compliance should begin with a theory of why people cheat on their
taxes. Economists approach the question of why people comply with the tax laws by
constructing a theory based upon the assumption about human behavior that underlies all of
economics, namely, individuals generally act rationally in evaluating the cost and benefits of
any chosen activity. According to Allingham and Sandmo (2002), economic theory of crime,
the extent of deterrence, as the product of the probability of being detected and the size of
fine being imposed, determines the amount of income tax evaded. Psychologists tend to
assume that individuals are moral beings with ideas and values of their own and that
commands and their own impulses filter through and are affected by this moral
screen. They should note that variables such as the probability of detection, size of fines and
so on are mediated through individual attitudes and perceptions.
According to Brooks (2001), sociologists also tend see the cause of variation in
human behavior in the structure of the social system. It is reasonable to assume that human
behavior ( Fjeldstad, 2004), in the area of whether or not to pay taxes is influenced by
social interactions much in the same way as other forms of behavior. Compliance
behavior and attitudes towards the tax system may thus be affected by the behavior of
an individual‟s reference group such as relatives, neighbors, friends and political
associates. Thus they explain people‟s actions by examining the forces that impinge on
the positions that they occupy within the system. Social scientists from almost every
discipline have turned their attention to tax evasion as social phenomena.
Eckstein (2003), summarizes that those who have carefully studied the public‟s
attitudes, perceptions, and knowledge of taxes and tax policy have generally found that
citizens are indeed remarkably misinformed and or confused. Lewis (2002), claims that most
people do not regard fiscal policy as an important issue and concludes that „the general public
is fiscally ignorant‟. In general, theories of tax compliance are organized around the
above three premises, namely, economic theories, psychological theories, and sociological
theories. Assessing all these theories helps to know why people comply with the tax law from
which an interested tax administration could deduce a comprehensive compliance strategy.
In other words, the determinant factors of tax compliance behavior emanate from these
theories in one way or the other so that the theories always serve as a baseline in
understanding tax compliance behavior.

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There is no magic or quick solution to increasing tax compliance. A reform strategy to
increase compliance requires a concerted, long-term, coordinated and comprehensive plan. It
is vital that tax administrators ensure that every compliance policy instrument at their
disposal is being used as effectively as possible. Multiple approaches are needed to reduce
the tax gap as illustrated by Simiyu (2003). No single approach is likely to fully and cost-
effectively address non-compliance, since it has multiple causes and spans different types of
taxes and taxpayers.
Generally, understanding these factors, and their interrelationships, that impact on
taxpayer behavior can help to develop targeted strategies which impact on the non-
compliant without adversely affecting compliant taxpayers. The most obvious requirement
for fairness or equity is to treat equal people in equal circumstances in an equal way. If there
is a reason for not discriminating between equals, then this suggests that there should be
discrimination between those who are not equal. Maintaining tax equity and fairness is not
achieved only through levying equal taxes on individuals who have equal income but also
each taxpayer should pay according to his ability, to pay which confirms assertion in James
(2000).
In addition, bringing non taxpayers to tax system has to be considered as a measure of
ensuring tax equity. It is unfair to say that the tax system is equitable as long as several
capable traders are not paying tax. Taxpayers will be discouraged to the extent that the tax is
believed to be unfair .Hence, the question of fairness or equity is not only about dealing
with current taxpayers but also concerned with people outside the tax system. Ensuring
equity means encouraging and protecting honest and loyal taxpayers by adopting fair
competition. This can be achieved by incorporating in to the tax system all those who are
eligible. The authority must also involve the taxpayers or their representatives while
estimating the daily sales or revenue of taxpayers to address the question of fairness
and equity. Generally, the authority has to try its level best in ensuring tax fairness and
equity so that voluntary compliance behavior can be developed, as emphasized in Brooks
(2001) that fairness is the most important criteria in judging a tax system
An effective compliance program requires that tax administration has sufficient powers
that enable it to enforce compliance effectively. Voluntary compliance is promoted not
enforced, but also by clear, simple and user friendly administrative systems and
procedures. According to Bird and Oldman (1998), Tax systems that depend on ad-hoc
administrative procedures rapidly become discredited and endanger compliance. To
encourage compliance, it is equally important that tax authority administers the law fairly.
The tax authority needs to be strong enough in order to implement the tax law
effectively and efficiently. Functions such as tax assessment, collection, awareness creation,
providing information, and enforcement has to performed effectively and efficiently, so
that it will be perceived as strong and powerful by the taxpayers. In addition to this
efficient service delivery to taxpayers is a key factor against which the strength of the
authority is judged. Taxpayers tend to evade to the extent they feel that the authority is weak
and unable to enforce the law. This directly hampers the compliance behavior of compliers
and motivates non compliers to continue evading.
In this study lack of awareness was cited as the major and leading reason for tax
evasion and the respondents strongly agreed that great effort has to be employed in this area.
Tax authority is the body responsible for assessing and collecting the town‟s tax revenue. The

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amount of revenue collected was directly dependent on the efficiency and effectiveness of the
authority. In light of this fact the survey result showed that tax authority of the
municipality administration was not efficient and effective in various aspects such as
improving the tax assessment and collection procedures, creating awareness, enforcing the
tax law, providing services, and information regarding tax. It can be concluded that,
so long as this was so, then it is not easy to bring about voluntary compliance and
narrow the tax gap.
Majority of the taxpayers believe that tax law should be respected and do not feel paying tax
is unfair. Similarly most of the respondents don‟t have trust in the employees of the authority
and also in tax estimation, assessment and collection procedures. From this it can be
concluded that this problem has emanated from lack of awareness and transparency in
the activities of the authority. Still majority of the respondents said that they feel guilty if
they do not pay tax and believe that their compliance is not contingent on the presence
of penalty, and even agree that severity of sanctions and penalties do not ensure voluntary
compliance.
The respondents also stated the possible actions that have to be undertaken in order to bring
about improvement in the tax system and ultimately ensure voluntary tax compliance. Several
respondents firmly commented that the tax system lacks fairness and equity. They further
elaborated that individuals having equal income are not paying equal tax and this highly
affects the taxpayers‟ motivation to be compliant and remain compliant. In other words,
as long as the tax system lacks horizontal equity (individuals with equal income pay equal
tax) it is difficult to change taxpayers‟ attitude in order to bring about voluntary
compliance.
The other point strongly raised by the respondents is that there are several individuals
who are doing business but not paying tax or not known as taxpayers. Similarly, there
are so many individuals who are engaged in illegal (contraband) trades and according
to the views of the respondents, all these abnormal acts are hampering their business
activities and as a result unfair competition has prevailed in the town. The respondents said
that the government has done little to curb these acts so as to reduce tax evasion. They
commented that these problems have created distortion in their market and affected their
attitude towards taxation negatively.
Summary of findings, Conclusions and Recommendations
5.2 Summary of findings
Tax authority regulations and administration affect voluntary compliance. There appears to
be a substantial tax gap between the tax that is theoretically assumed to be collectable from
economically active individuals in the town and the tax that is actually being collected.
The taxpayers do not to comply with the tax laws due to overstatement of tax rates or lack of
tax equity and ineffectiveness of the tax authority.
5.3 Conclusions
The tax system lacks fairness or equity, poor communication between the tax authority and
taxpayers, weakness in tax collection and enforcement, absence of transparency in the overall
tax system.

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The tax authority and regulation is unfair to most taxpayers. Generally as long as the tax
being levied is not fair and equitable it may reduce the motivation and voluntary compliance
behavior of current taxpayers and also deter potential taxpayers from joining the tax
system voluntarily.
The tax authority is not effective with respect to tax collection and enforcement. There are
several taxpayers who are not included in the tax bracket and large amount of uncollected tax
exists as arrears. The tax authority exercises little effort in enforcing the tax law due to
authority‟s lack of capacity. Most of the taxpayers do not know how to determine or calculate
their tax themselves which is attributed to poor tax education.
5.4 Recommendations.
One of the areas to stress on while dealing with the issue of voluntary compliance is the
development of persuasive communications between the tax authorities and taxpayers. The
most effective tool for making people more positive is to empower them with tax
knowledge.
There should be more preventative education for the public and increased awareness of tax
responsibilities in schools. Students should be educated meet their tax responsibilities early
in their careers. All of these promote a positive view to voluntary compliance. This is to
inculcate in citizens a sense of responsibility toward taxes. There is a need for citizens to
understand and accept their responsibilities of compliance. There is also a need to
publicize the tax burden carried by compliers versus the burden that would be carried if
everyone complied.
Hence, to create an efficient tax administration, the tax authority needs to strengthen itself by
educating and training its employees, by computerizing its operations and devoting
additional resources. Training should include customer service training and cross functional
training for employees so they have an understanding of the entire system of tax
administration. The authority should make the tax law and procedures simple,
understandable, and transparent. Voluntary compliance is enhanced when vibrant and
efficient tax authority exists.
5.5 Areas for further study
Areas for further study include impact of political systems on compliance and study of human
behavior towards tax; other factor that influence compliance including socio-cultural,
taxpayers‟ ability and willingness to pay, tax awareness etc.
Reference
 Allingham, M.G. & Sandmo, A.(2002). Income Tax Evasion: A Theoretical Analysis.
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 Bird, R. M. & Oldman, O. (1998).Readings on Taxation in Developing Countries,
Revised. edition. Baltimore, USA: The John Hopkins Press.
 Brooks, N. (2001). Key Issues in Income Tax: Challenges of tax administration and
compliance. Asian Development Bank Tax Conference.

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 Brown, R.E & Mazur, M.J (2003). IRS‟s Comprehensive Approach to Compliance.
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 presented at National Tax Association Spring Symposium in May 2003, Washington
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